An Explanation of Common Financial Terminology

The world of finance is full of baffling phrases, needlessly complicated terminology and wacky slang.

Whether its stock traders discussing bears, bulls and cockroaches, or sophisticated investors asking about acid tests and puke points, it sometimes seems as though financial jargon has been intentionally designed to confuse.

We’ve broken down some of the most ridiculous terms in the financial dictionary, so you can approach your portfolio with the confidence of a bull.

Acid test

Also known as the ‘quick ratio’, this is a calculation to figure out whether a company has enough assets to meet its immediate costs and liabilities. If a company fails the ‘acid test’, it will likely need to take on more debt to continue its business, which may put off some prospective investors.

Affluenza

A term used to describe greedy investors, who are driven by a need to acquire more and more wealth and assets. Usually used by accountants and financial advisors when dealing with short-sighted clients.

Ankle biter

Sometimes used to describe small-cap businesses that show a lot of growth potential.

Arbitrage

A complex financial process whereby assets are bought and sold simultaneously in different currencies or on different markets, so that the trader can benefit from minute differences in price.

When done on a large scale, it can be extremely profitable.

Bearish

In the financial world, bears are the pessimists, and bulls are the optimists. A bearish market happens when stock prices start to fall, and a general sense of pessimism causes them to fall even further.

Black swan

Coined by the writer Nassim Nicholas Taleb to describe the global financial crisis, a black swan is an incredibly rare financial event which is impossible to predict. For obvious reasons, it is usually only used in hindsight.

Bullish

The opposite of ‘bearish’ – bulls believe that the market is strong and on the up. If you have a bullish outlook on the market, it means that you expect your stocks to rise. When enough people feel bullish, it can cause an artificial boost in stock prices as traders switch into buying mode.

Capital adequacy ratios

A strict formula that all British banks have to comply with – it ensures that banks have enough cash on hand to pay out their customers at any given time. Under current law, every bank should hold at least eight per cent of its total value in cash.

Cats and dogs

Often called ‘penny stocks’, cats and dogs are extremely low value stocks which do not file financial statements. They are considered to be among the highest risk stocks on the market.

Circular trading

An illegal scheme where traders try to game the market by placing ‘sell’ orders for stocks that have already had ‘buy’ orders issued against them. The result is a static market, where no gains or losses can be made.

Cockroach theory

This is the theory that bad news will always follow bad news. Based around the idea that if you see one cockroach, there must be a dozen more that you can’t see. For instance, if a company reports huge losses or illegal activity, the cockroach theory suggests that other companies will soon admit to the same.

Dead cat bounce

An unfortunate term which describes a surprise – but temporary – rally in the market.

Deer market

Elasticity

A formula which is used to show the extent to which consumer demand impacts on the price of a company’s stock. For instance, pharma companies tend to have a low degree of elasticity, as sick people will always need to buy medicine regardless of the price. On the other hand, airlines usually have higher elasticity, as individuals may choose not to travel if the prices are too high.

Froth

This is the activity which happens before a bubble. Sometimes analysts will say the market is frothing when a particular sector appears to be doing particularly well against all odds. Investors like the idea of investing in a frothy sector, so that they can take advantage of the short-term growth, then sell out before the bubble bursts.

Gearing

A word used to describe a company’s debt levels compared to its equity.

Goldilocks economy

The perfect economy: not too hot, and not too cold. It usually refers to an economy which has low unemployment, a rising stock market, low interest rates, low inflation and economic stability.

Liquidity trap

A difficult economic situation where interest rates are low, but savings rates are high, resulting in little incentive for people to buy bonds or stocks. This results in an overall slowing of the economy. Central banks (such as the Bank of England) are always working to avoid liquidity traps

Margin call

When an investor borrows money from a broker to make an investment, a ‘minimum maintenance margin’ is agreed. This means that if the overall value of the investment falls by a certain amount (usually 25 per cent), with the investor required to make up the difference. When this happens, the broker makes a ‘margin call’, requesting the extra money from the investor.

Puke point

Every investor has their own ‘puke point’ – the point at which a stock price has fallen by so much that they want to exit the investment, no matter the cost.

Sleeping beauty

A term used to describe a small company or start-up which has good assets, but poor management. The idea is that once the management has been replaced (either via a restructure or acquisition) the company is primed to perform extremely well.

Please note: The information provided on this site does not constitute financial advice. The value of investments can go down as well as up and your capital may be at risk. Always speak to a qualified independent financial advisor if you require advice.

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